Legal Update

FORECLOSURE FORBEARANCE AGREEMENT MUST BE IN WRITING TO BE ENFORCEABLE

  • July 18th, 2010
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On October 9, 2008 the California Court of Appeal ruled that a lender’s oral promise not to foreclose on a homeowner was not enforceable unless it was put in writing and signed by the lender.  Secrest v. Security National Mortgage Loan Trust 167 Cal. App. 4th 544 (2008)

FACTS: The Secrests purchased a home in Orange County by borrowing $550,000 from GE Capital Mortgage with a note and first deed of trust recorded against their home.   The note and deed of trust was sold to Ocwen Federal Bank.   Within a few years, the Secrests began having trouble making their loan payments and went into default.   The Secrests began negotiating with a loan resolution consultant representing Ocwen seeking agreement on a workout plan to defer certain payments and avoid foreclosure.    In a telephone conversation with the Ocwen consultant an agreement was reached that if Secrest paid $13,000 in cash and remained current on lower monthly payments thereafter, that the lender would not foreclose.

The Ocwen consultant prepared a written forbearance agreement and faxed it to Secrest for signature.  Ocwen agreed that if Secrest signed and faxed back the agreement and wire-transferred the $13,000, that Ocwen would stop all collection efforts.  Secrest did so and sent the $13,000 to Ocwen.   Ocwen never signed and sent back the forbearance agreement and instead resold the loan to Security National Mortgage.  Security National then recorded a notice of default and election to sell under the deed of trust.  Secrest sued to stop the foreclosure and enforce the forbearance agreement.  The Superior Court ruled that the agreement was unenforceable because it was not signed by the lender.  Secrest appealed.

DECISION: The Court of Appeal affirmed.   The court ruled that the forbearance agreement came within the statue of frauds and was therefore not enforceable because it was never signed by the lender.  A contract coming within the statute of frauds is invalid unless it is memorialized by a writing subscribed by the party to be charged or by the party’s agent. (Civ.Code, § 1624.) Under Civil Code section 1624, the party to be charged means ” ‘the party to be charged in court with the performance to the obligation, i.e., the defendant in the action brought to enforce the contract. ‘

An agreement for the sale of real property or an interest in real property comes within the statute of frauds. (Civ.Code, § 1624, subd. (a)(3).)  A mortgage or deed of trust also comes within the statute of frauds. Civil Code section 2922 states: “A mortgage can be created, renewed, or extended, only by writing, executed with the formalities required in the case of a grant of real property.”  The forbearance agreement, though not creating, renewing, or extending the note and deed of trust, did modify them.  An agreement to modify a contract that is subject to the statute of frauds is also subject to the statute of frauds. (Civ.Code, § 1698, subd. (a).

The Secrests also argued their making the downpayment on the forbearance agreement constituted part performance sufficient to estop the lender from asserting the statute of frauds.   Before a party can be estopped to assert the statute of frauds due to the other’s part performance, it must appear that a sufficient change of position has occurred so that the application of the statutory bar would result in an unjust and unconscionable loss, amounting in effect to a fraud. The payment of money is not ‘sufficient part performance to take an oral agreement out of the statute of frauds’, for the party paying money ‘under an invalid contract … has an adequate remedy at law.

ANALYSIS: In today’s economic climate mortgage defaults have unfortunately become almost commonplace.  Borrowers and lenders are scrambling to find reasonable terms upon which to renegotiate the loan terms to avoid foreclosure.   This case provides a loud and clear warning that any workout or foreclosure forbearance agreement must be put in writing and signed by all parties.  Oral promises provide no quantum of solace.